Air Transport in the 21st Century

Colin Lewis

Airline Industry Strategies

Independent Alliances Code Sharing

Economy Premium Economy

Business class

First

Routes andRoute Structure

Structure

Fares

Customers

Product

Wide-body Narrow body

Regional Jet TurbopropAircraft type

Scheduled Flights

Chartered Flights Air Freight

Business Travelers

Leisure VFR

Short Haul Long Haul

Hub and Spoke Point to Point

Intra-Industry RivalryRivals: FR, EI, BE, BMI, RE,

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Internal audit

• Travel Agents • Corporate

travellers• Government• Leisure Travelers• Charter

• Alternate Travel Services• Road• Boats• Car

• Videoconferencing

• Aircraft Manufacturers• Aircraft Leasing Companies• Food Service Companies• Fuel Companies• Airports• Local Transportation Service • Google

• Foreign Carriers• Regional Carrier Start ups

Porter 5 forces

Airline Profitability

• Airlines (try to) manipulate three main variables:

• Cost, calculated as total operating expenses divided by available seat miles (ASM)

• Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM)

• Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilisation.

Profitability = [yield X load factor] - cost

First flight by Orville Wright, December 17, 1903

Airline Industry Financial Viability?

“If I had been at Kitty Hawk when Orville Wright took off, I would have shot him down as a public spirited act for the benefit of future capitalists”

Warren Buffett

Today

• For 2008, global airline losses $5bn

• For 2009, global airline losses circa $4.1bn

• Passenger traffic is to decline by 3%

“We face the worst revenue environment in 50 years”

IATA CEO.

Open Skies = Closed Skies

• EU and US have the most deregulated domestic aviation markets in the world.

• Open skies

• Nationality restrictions

• ‘Flag’ carrier

• Example: Air France

The Market

Customers balance time v price

• Time is a multiple of convenience factors:

o Timetables

o Closeness of the airport to home and to destination

o Ease of travel through, to and from airports

o Ease of travel through the airport

• Price willing to pay varies on ability to pay and reason for travel.

o Corporates decide on timetables

o Leisure &VFR travellers decide on airport ease of access and time of day

o More flexible travellers decide on cheapest price and are willing to be spend time and effort to get it

• Short haul flights are commoditized – long haul still premium

Pricing

Theory vs Practice

Simple Concepts

• Relatively fixed seat capacity

• High fixed costs

• Combination of elastic and inelastic market segments

VS

Reality

• Oligopoly

• Strategy is generally dominated by mechanics

• Pricing process is often unclear to airline management

Question for you?

What is a good price to pay for a

Dublin – London flight?

Distribution

Many Distribution Points

Call Centre

GDS

Website

OTA

FFP

Corporate

Tour Operators

Partners

End Customer

AirlineCapacity

Online Misconceptions

• Online sales account for 26% of tickets globally.

• USA online sales is around 50-60%.

• EU 36%

• E.g. KLM ??

Why?

• GDS power

• Reach

• Yield

• Corporates

Where does the Airline

Industry go from here ?

Legacy vs Low Cost

Network Model imposes higher costs:

• Two-class cabin

• Connecting passengers and bags

• More ground staff

• Slower turn-rounds

• More expensive airports

• Higher Staffing levels

• Out-dated work rules

• More expensive distribution (e.g. agents and GDSs)

• Mixed fleets

Legacy Options?

• Match LCC costs - but difficult to close gap

• Transform themselves into LCC

o i.e. Independence Air, US Air/America West

• Spin off a low-cost subsidiary, e.g. Jetstar, (Qantas) or Tiger (SIA), =>few succeed – Buzz , Go, Snowflake, Song

• Refocus on long-haul markets and reduce/outsource short-haul

• Mix the best of both e.g. Frontier airlines

Shape of things to come – Southwest?

•Largest carrier in 90 of SW's top 100 markets

•77% share of intra-Texas traffic

•71% share of intra-California traffic

Future?

• 3-5 Long-haul Network dominators per regiono Except for middle east!

• Low-cost Service Providerso Low cost (2 to 3 majors)o Charters (2 to 3 majors in Europe)

• Niche Carrierso Regional or national o Cargo